Kinder Morgan's CO2 Operations Are No "Weak Link"

CO2-injection oil recovery is often seen as the "weak link" to Kinder Morgan's business. But exposure to this very lucrative business should be seen as a positive, not a negative.

Apr 13, 2014 at 1:00PM

Kinder Morgan Energy Partners' (NYSE:KMI) exposure to carbon dioxide makes the partnership a unique one. No other major, diversified partnership has exposure to both CO2 production and sales and the upstream oil activity in which the CO2 is used. 

Exposure to upstream CO2, or CO2-injection oil recovery, has been one of the major talking points in media attack pieces on Kinder Morgan. A claim made repeatedly by Barron's for example, is that once CO2-based oil production matures and declines, Kinder Morgan's distributions will also decline. Many view CO2 as Kinder Morgan's weak link, but nothing could be further from the truth. While it is certainly true that every oil field will eventually decline, I don't believe CO2 exposure should be viewed as a weakness.

Kmp Co

Source: Kinder Morgan Investor Relations.

This chart illustrates exactly why. As CO2 recovery techniques improve, management continues to put off the inevitable date of "peak CO2." Meanwhile, output continues to grow. The current estimate is for production to peak in 2017 and begin declining by about 2019. That's five years from now, and Kinder Morgan is pretty certain that growth in other sectors will offset the decline in CO2. And who's to say that CO2 production will not again be revised upward within the next five years? 

CO2-injection oil recovery is quietly becoming an integral part of oil production in North America and elsewhere. As traditional oil basins mature and conventional pressure pumping becomes less effective in those locations, oil companies have turned to enhanced recovery techniques to bolster production. CO2 injection is the foremost of these methods. Here are some tidbits that show just how successful it has been.

Occidental Petroleum (NYSE:OXY) is one of America's biggest oil producers and has a wide array of acreage around the world. Occidental is also the third-largest producer via CO2-injection, and the company's CO2-injection segment is consistently the most profitable part of its business. 

Kinder Morgan is the second-biggest producer, and CO2 is also its most profitable segment.

Denbury Resources (NYSE:DNR) is the largest producer and the only CO2-injection pure play in the country. Denbury's margins generally outstrip those of every other major producer in the lower 48. 

None of these above facts are coincidences. CO2-injection oil recovery is highly profitable because it is done in already established basins using vertical drilling. Furthermore, the oil extracted using these methods is at relatively shallow depths.

Foolish takeaway
Late last month, Kinder Morgan announced it would spend $1 billion on another CO2 pipeline running from northern New Mexico to the Permian Basin. The pipeline will feed Kinder Morgan's CO2 fields and will be operational in early 2016. It is not yet clear whether this project will further delay "peak CO2," but the project will certainly add high-margin cash flow.

Viewing CO2-injection drilling as a point of weakness for any upstream company is often a highly flawed assumption. Yes, oil fields with CO2 injection will eventually decline, but for now there are industry-leading margins to be made in America's oldest producing basins, and Kinder Morgan is doing just that.

3 stock picks to ride America's energy bonanza
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You To Make This Energy Investment." Don’t miss out on this timely opportunity; click here to access your report -- it’s absolutely free. 

Casey Hoerth owns shares of Kinder Morgan Energy Partners LP. The Motley Fool recommends Kinder Morgan. The Motley Fool owns shares of Denbury Resources and Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers